Introduction of VAT to be delayed until 2010

Saeed Khalifa Saeed Al Marri, Deputy Director-General of the UAE Federal Customs Authority, was quoted by Bloomberg as saying that replacing import tariffs with VAT might not be possible unless all six GCC countries adopt the system together. "VAT has not yet been approved. The government is studying the impact and wants to know all the positives and negatives so it might not do it at all, may be by 2010," he was quoted by the news agency.

Al Marri's stance that the UAE would not introduce VAT until at least 2010 is contrary to the views expressed by Dubai Customs officials. Dubai Customs Director-General Ahmad Butti Ahmad said in June that federal lawmakers were drafting legislation for VAT's implementation early 2009. "All the details and the date of introducing the new taxation system are yet to be finalised at the federal level."

"If we reach the point where it might come into effect, that means we have to study all the procedures, because it will affect the customs union and it will affect even the whole customs work in the UAE,'' Al Marri was quoted as saying.

According to analysts, a three per cent VAT, which is expected to replace customs duties, will not have any major impact on UAE's inflation currently skirting an all-time high of 12 per cent. “As VAT is going to replace the current customs duties amounting to five per cent, it will ensure price stability and help check further rise in inflation," they said.

Butti Ahmad also sought to allay widespread concern that VAT would aggravate inflationary pressures. According to him, revenues from the new VAT system would match that from customs duties which are to be phased out when the new taxation is implemented. "The VAT system would not have any negative effect on our inflation rates," he has said.

Analysts said the removal of customs duties is inevitable under free trade agreements which the UAE is entering into with other countries. The system would bring a lot of benefits to the UAE as it is highly transparent and accurate, they pointed out. According to experts, VAT also would not have any negative effect on foreign investments because foreigners are used to such taxation systems and they prefer to operate under the umbrella of this system instead of being subject to unclear taxes.

In May, Dubai Customs Executive Director Abdul Rahman Al Saleh dismissed IMF's views that implementing VAT would fuel inflation in the UAE and said VAT would have significant positive impact on the economy of the UAE. Reacting to the observations made by Mohsin Khan, IMF regional director for the Middle East, about the chances of inflation surging in the UAE and the GCC region by two per cent in the wake of VAT introduction Saleh said his statements were incompatible with an earlier IMF report that praised VAT and stressed the need for an immediate implementation to strengthen the UAE economy.

issacjohn@khaleejtimes.com